Sunday, December 30, 2012

If we define "doing well" as having excess income and wealth to spend on gratification, we have defined the wellspring of discontent.

There is an old and bitter maxim that describes the missionaries who sailed to Hawaii in the early-1800s: "They came to do good and stayed to do well." Is it easier to "get rich" than to do good? Does "doing well" create fulfillment or just an ephemeral gratification? Is it possible to "do good" and "do well" at the same time, or is the "to get rich is glorious," wealth-is-good mindset a self-serving illusion?

These questions help me crystallize one purpose of my work on the blog and in my books, which is to re-integrate meaning, work, happiness and our marketing-consumerist culture and economy.

In general, we assume (with much nudging) that wealth and happiness are tightly correlated, i.e. getting rich will deliver greater happiness just as a matter of causality. We are also pounded to believe that doing well will magically create a greater good--something every hedge fund manager pulling down $600 million annually wants to believe.

Yet studies find the correlation of wealth to happiness to be far weaker than generally assumed. This reflects the compartmentalization of marketing, economics and psychology: psychologists study human happiness in families and individuals, and occasionally in workplaces, but rarely in an entire economy/society.

I have argued in Resistance, Revolution, Liberation that our marketing/consumer-based economy excels in distributing social defeat; indeed, social defeat (the surrender of autonomy, acceptance of low social status, a permanent state of anxiety and insecurity, dependence on the Central State) and increasing inequality are causal consequences of the Status Quo.

This derangement is so backgrounded and "natural" that we fail to see it, much less expose it to critical inquiry.

In his mid-1960s analysis of Marxism and Existentialism, the Critique of Dialectical Reason, Jean-Paul Sartre stated that the root drive of humanity was besoin (need): we respond to need, and economics and politics arise from those responses.

Recent scientific research into human happiness has located a distinction between "want" and "need" that corresponds to the difference between gratification and fulfillment. The drug addict seeks the gratification of a desperate need, yet the "hit" does not generate happiness in the sense of joy or fulfillment.

The entire purpose of consumerist marketing is to transform a "want" into a "need," and thus to turn potential fulfillment into mere gratification. Meaning and joy are reduced to urges that demand gratification.

If we define "doing well" as having excess income and wealth to spend on gratification, we have defined the wellspring of discontent. If we define "doing good" as experiencing fulfillment and happiness, then it seems "doing well" (accumulating "stuff" and wealth) is ontologically distant from doing good.

If we integrate our understanding of human happiness with our critique of the marketing/State/consumerist Status Quo, we get a clearer understanding why "growth" and "wealth" yield so little meaning and fulfillment and such an abundance of alienation and disappointment.

"The grand essentials to happiness in this life are something to do, something to love and something to hope for." Joseph Addison (via Susan J.)

This essay was drawn from Musings Report 33. The Musings are sent weekly to subscribers and major financial contributors (those who contribute $50 or more annually).

Gordon T. Long has assembled an excellent review of 2012 excerpted from the 20 video programs we taped in 2012 (also available as podcasts): the Recap is 23 minutes and includes 33 slides:

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization2. Crony capitalism and the elimination of accountability3. Diminishing returns4. Centralization5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

"There's absolutely no reason they ever have to find out," Robin reassured her. Stopping by a delightful outdoor cafe in the Parisian style, Robin lifted Kylie's straw hat to gaze at her theatrically. "You look famished.”
"Do I look that hungry?"
"To my practiced eye—yes."
"I did skip lunch to rush over here," Kylie confessed, and then noting the implication gladdened Robin's heart perhaps too much, stammered, "I mean, I wanted to see if there was anything I could do to help settle Ross in."
"Of course," Robin replied smoothly. "But it's all taken care of, so let's eat. How about this place?"
Kylie made a show of glancing at the day's posted menu and then turned to Robin in guilt-ridden hesitancy. "I didn't call Ross back yet. I don't want him to think I ignored his invitation."
Anxious not to disrupt the delicate alignment of chance and renewed romance, Robin suggested, "Just tell him you've been delayed. After all, you are starving."
"No need to exaggerate," Kylie said, for even this modest white lie weighed on her.
"Well then, let's go back."
"No, I just want to call him." Accessing her phone's menu, Kylie selected Ross's number and then smiled coyly at Robin while the call went through. Unbeknownst to Kylie, Ross was on foot just a few blocks away; but having left his phone on the dresser in his temporary quarters, he did not receive her call.
Turning away from the street traffic, Kylie cupped her phone and left a message describing her delay, and promised to call again later. Her guilt assuaged, she accompanied Robin into the bistro thinking, This day is turning out much better than it started.

* * *

To an observer, it might have seemed that Kylie's pleasure in the day was on a see-saw with Ross's. When Ross was high in the air, delighting in his airy new refuge and the knowledge that his cherished toaster collection was unharmed, Kylie was trodding the hard bitter ground of disappointment. Still smarting from her loss of Robin's romantic interest, she knew her enthusiasm for the grant-writing position had been transparently ersatz; as a result, the interview had dragged on in a dismal ritual with an easily foreseen dead-end.
Later, after a delightful lunch of goat cheese crepes interspersed with giggles and dewy-eyed glances, Kylie joined hands with Robin and walked to the immensely romantic domed magnificence of the Palace of Fine Arts in a daze of hope restored and happy anticipation. Meanwhile, Ross was falling with gravity's full weight to the rocky soil of frustration. His return call to Kylie had gone unanswered, and he muttered aloud, "What good is good fortune if there's nobody to celebrate it with?"
Speaking sotto voice to the unseen cat, Ross offered, "Hey, Hanover. How about sharing a kitty bowl of nice Cabernet with me?"
"Huh," Ross snorted as the cat gazed curiously at him. "I thought as much. Another loner."
Casting about for a project to relieve his boredom, Ross cursed himself for almost forgetting to file his application to the Vintage Appliance World show in Las Vegas. Although he hesitated to use the owner's desktop computer without her permission, permission was not possible; and with the deadline mere hours away, the only alternative was to file it from someone else's computer. And since he had no friends in San Francisco, it was easier to shelve his ethics for an hour than catch a bus or BART back to the East Bay.
Resisting the urge to pry—since there was no password required, he could easily have opened this A.R.'s email—Ross plugged in his digital camera, loaded the photos and then spent the afternoon perfecting the images and his online application. As he sat in his unknown hostess's artful living room, Ross glanced between the vintage dolls in their sleek Japanese cabinets and the film posters on the walls and reckoned it was some sort of cosmic, parallel-universe type of coincidence that A.R. seemed to value the same things as GreenDollGal.
The photos finally met his exacting standards, and he told himself with steely determination, This is for the money, Honey. Despite that wretched GreenDollGal's interference and being burned out of my house, I'm still getting in as a featured collector, not a lowly spectator. Taking a deep breath, he clicked the mouse button and filed the application.
"Hanover, I refuse to wallow in self-pity any longer," he announced. "I'm taking a shower, shaving, dressing in my finest available clothing, and sitting down to a fabulous steak dinner and silky-smooth Cabernet. And by Jupiter, you'll get your share of morsels, too. We celebrate together, or not at all."

Thursday, December 27, 2012

The fiscal cliff is not a one-time political event; it is a generational process that ends in the collapse of the Status Quo.

To understand the fiscal cliff's inevitable endgame, we need to start with the financial and political basics of wealth and power in the U.S.

1. Wealth and thus political power are highly concentrated. The dynamics of rising wealth disparity and the increasing concentration of wealth are debatable; the disparity is not. Roughly 70% of all financial wealth is held by the top 5%; within this top layer of ownership, the top ½ of 1% hold an outsized share.

2. This preponderance of wealth in the hands of a few translates into an equivalent preponderance of political power, as there are no real limits on the purchase of political influence, favors and power.

3. The U.S. income tax is highly progressive; most Federal taxes are paid by a minority of the citizenry. The top 1% of taxpayers reported almost 17% of all taxable income and paid 37% of all income taxes. The top 5% reported 32% of all income and paid 59% of the taxes, and the top 10% earned 43% of the income and paid 70% of the taxes.

The top 25% (those earning more than $66,193) paid 87% of the taxes. The bottom 50% of taxpayers, roughly 70 million people, earned 13% of the income and paid 2% of the income taxes collected.

4. There are roughly 127 million people who receive government transfers or benefits. Sixty-one million recipients of Social Security and Medicare and 66 million people receiving welfare (SNAP food stamps, housing credits, Medicaid, etc.) Since there are about 115 million full-time jobs in the U.S., this means there are 1.1 government dependents for every full-time worker in the U.S. (For context, there are 315 million Americans and roughly 142 million jobs. About 38 million of these jobs are part-time that pay less than $10,000 annually. Fifty million wage earners earn less than $15,000 a year, and 61 million earn less than $20,000 annually.)

The Federal government counts a person who is self-employed and earns $100 a year as "employed" and a person who works one hour a week as "employed." As a result, the only meaningful metric is full-time employment.

The top 25% who pay most of the taxes, roughly 30 million people, are a political minority compared to the 127 million people drawing direct payments/benefits from the Federal government and the 65+ million who pay essentially no income taxes (though they do pay the 7.65% Social Security/Medicare payroll tax).

5. This progressive tax structure is based largely on earned income; i.e., wages and self-employed income. Unearned income (rents, dividends, stock options, hedge fund management fees, etc.) is treated much differently than earned income. Unearned (rentier) income is governed by highly complex tax codes that lend themselves to politically controlled loopholes, subsidies, and exclusions. As a result, some profitable corporations not only pay no tax but actually receive subsidy payments from the government. In other cases, politically powerful enterprises have tax laws written specifically to limit or erase their tax burden.

The tax code treats unearned income quite differently from earned income in many other ways. For example, all unearned income is excluded from the Social Security/Medicare payroll taxes. A self-employed person pays 15.3% of their earnings in Social Security/Medicare payroll taxes; a person receiving the equivalent sum in rents and dividends pays zero Social Security/Medicare payroll taxes.

6. The assets that generate unearned income are highly concentrated, and as a result so is the unearned income. The top 1% owns twice as much stock-market wealth as the bottom 90%. This income-producing wealth enables the top 1% to act as a financial aristocracy, buying influence and favors from equivalently concentrated political Elites.

This preponderance of ownership of income-producing assets is reflected in the income stream flowing to the top 5%:

7. Those without meaningful unearned income have seen their real incomes drop substantially. Real household income has declined almost 10% since 2000:

Here is another look at the data. Note that the drop in all household income is less than the decline in working-age households. This is the result of Federal transfer payments to retirees, those on disability, aid to low-income households, etc., paid for with unprecedented deficit spending ($1.3 trillion annually).

8. Federal spending has followed an exponential trajectory.

Social Security costs over $800 billion, Medicare and Medicaid costs total about $800 billion annually, and the Pentagon/National Security budget is around $800 billion. These three consume all Federal tax revenues. Add in interest on the ballooning national debt ($220 billion to owners of so-called external Treasury debt) and the nation is running a $200 billion deficit even if the rest of the $1.1 trillion Federal spending were to magically vanish.

Put these structural dynamics together and the endgame becomes clearly visible: Politically, a Tyranny of the Majority comprised of those who draw direct transfers/benefits from the Federal government, is ruled by the top ½ of 1% financial aristocracy who own the majority of income-generating assets. The minority, who pay most of the taxes (the 24.5% between the majority and aristocracy), will see their taxes rise as the aristocracy buys loopholes and exclusions while the bottom 50% pay no income tax.

Financially, the Federal government’s spending has outrun the tax revenues being collected. Structurally, Federal expenditures for entitlements (Medicare, Medicaid, Social Security, Veterans Administration, etc.) will rise as Baby Boomers retire en masse over the next 15 years, while tax revenues will stagnate along with earned income.

There is no way to square these circles.

The political foundation of America is starkly unjust. An entrenched financial Aristocracy buys the complicity of the bottom 50% and retirees with Federal transfers – a Tyranny of the Majority. The 24.5% below the Aristocracy who pay most of the Federal taxes are dominated by this alliance. This may be legal, but is it just? Even more critically, is it sustainable?

The Status Quo rests on this Grand Political Bargain:

We in the Aristocracy will pay significant taxes as long as we control the levers of financial and political power. We in the top 24% will pay the rest of the income taxes as long as we and our children can continue to live well and accumulate wealth. We in the "middle class" will continue to work hard as long as we have hope of bettering our lifestyle and the lives of our children. We in the bottom 50% and retirees agree not to threaten the top 0.5%'s power as long as we continue to get our government transfers and benefits.

This Grand Bargain is coming apart as the promises made to everyone cannot possibly be met. Claims on welfare and disability programs are skyrocketing at the same time that the demographics of an aging populace are causing 10,000 people a day to enter Social Security and Medicare, the two costliest government programs. Meanwhile, the upper middle class that pays most of the taxes has been slammed with lower income and a devastating drop in their housing-based net worth.

According to former Congress members Chris Cox and Bill Archer, writing in the Wall Street Journal:

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion.

That is roughly double the entire annual Federal budget.

They go on to note that “to collect enough tax revenue to avoid going deeper into debt would require over $8 trillion in tax collections annually.” Expropriating the entire income of the top 25% of households that pay almost 90% of the tax and all corporate taxes would only bring in $6.7 trillion.

Clearly, the promises that have been made to 315 million Americans cannot be met, and the current strategies of financial repression (zero-interest rate policy, etc.) and massive fiscal deficits that subsidize favored cartels in defense, housing, education, and healthcare are unsustainable. The politically expedient “fixes” to the Fiscal Cliff (a slight increase in the tax rate on earned income above $250,000, etc.) will not fill the $86 trillion gap between what has been promised and what can be collected in taxes.

What few dare admit, much less state publicly, is that the Constitutional limits on the financial Aristocracy and the Tyranny of the Majority have failed. This guarantees a future Constitutional crisis as each political class – the financial Aristocracy, the top 24% who pay most of the taxes, the dwindling middle class and the bottom 50% who depend on Federal transfers – will battle for control as the Status Quo collapses under the weight of its unsustainable promises.

In Part II: What Will Happen When We Hit the Fiscal Cliff, we explore the repercussions that will result from this crisis. Looking at the three most probable outcomes that will impact U.S. households, 2013 looks like it is shaping up to be a year where there will be little shelter available to financial assets.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization2. Crony capitalism and the elimination of accountability3. Diminishing returns4. Centralization5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

The common feature of the transformative technologies of the 20th and 21st centuries is that they were one-offs that cannot be duplicated.

What if the engines of global growth that worked for 65 years (since 1945) have not just stalled but broken down? The primary "engines" have been productivity gains from industrialization, real estate development and expansion of consumption based on the continual expansion of debt and leverage--in short-hand, financialization.

The Status Quo around the globe has responded to the obvious endgame of financialization (the 2008 financial crisis) by doing more of what has failed: expanding credit and leverage, flooding the global economy with liquidity (money available for borrowing), credits and subsidies for real estate development and a near-religious belief in "the next industrial revolution" that will spark rapid growth in employment, profits and productivity.

"The usual suspects" for the next engine of growth include nanotechnology, biotechnology, unconventional energy and Digital Fabrication, i.e. 3-D printing and desktop foundries. But are any of these capable of not just replacing jobs and revenues in existing industries, but creating more jobs and expanding revenues and profits?

There is a growing literature on this very topic, as many start questioning the quasi-religious faith that there will "always" be another driver of growth, i.e. the expansion of wealth, profit, employment and assets.

The Status Quo dares not even entertain this question because the only way to service the fast-rising mountain of debt that is sustaining the Status Quo is to "grow our way out of debt," i.e. expand the real economy faster than debt.

The past 250 years has been one long "proof" that we can indeed "grow our way out of debt" because the low-hanging fruit of industrialization and cheap, abundant energy enabled wealth to be created at a faster pace than debt.

Clueless Keynesians mock those questioning the possibility that the low-hanging fruit has been plucked by noting that doomsdayers were actively decrying the ballooning debt of the British Empire in the mid-1700s. We all know how that story ended: what looked like crushingly massive debt in 1780 was reduced to a trivial sum by the rapid expansion of industrialization.

But suppose the end of cheap, abundant energy (replaced by abundant, costly energy) and the Internet spells the end of centralized models of growth? What if all the innovation currently bubbling away only produces marginal returns?

Take biotechnology for example. Those with little actual knowledge of biotech are quick to latch onto the potential for genetic engineered medications, biofuels, etc. What they don't ask is if these technologies can scale up while costs decline, i.e. the computer technology model where everything progressively gets cheaper and more powerful.

Biofuels may have promise, but it still takes "old fashioned" energy to collect the feedstock, and it is a non-trivial task to keep micro-organisms alive on the scale that would be needed to produce a useful amount of liquid fuels, i.e. a few million barrels every day. Some processes may not scale up, and others may not see any significant reduction in fuel costs once the full input costs are calculated.

Genetic engineering also may not scale up--it may be limited by key barriers of individual patient complexity and by intrinsic costs that do not drop enough to make a difference.

Consider the diseases that have almost been eradicated--polio, for example--and the lifestyle diseases such as diabesity. The wave of diseases that were eradicated were caused by bacteria or viruses: a vaccine or agent that disabled or killed the bacteria/virus wiped out the disease.

Diabesity, cancer and heart disease are not caused by a single virus or bacteria. The "one med/vaccine works for all" model has failed and will always fail because diabesity and other lifestyle diseases have multiple, non-linear causes that are beyond the reach of a single "solution." These diseases may well be tied to epigenetic factors, for example, the interaction of "junk DNA" with environmental stresses that extend back into the individual genome.

What we face is the confusion of symptoms and effects with causes. Lowering cholesterol is not the "magic bullet" many hoped for, and neither was hormone therapy.

In the technology sector, it is clear that the Internet is destroying entire sectors of employment. The jobs that have been lost for good have not been replaced by jobs created by the Internet, nor is there any credible evidence to support this hope: automated software continues chewing up one industry after another, and the politically protected fiefdoms of healthcare (sickcare), education and government have yet to taste the whip of real innovation.

Rather than add jobs, we will lose tens of millions of jobs as faster-better-cheaper breaches the walls of these massive politically protected fiefdoms.

Healthcare spending is clearly in terminal marginal return: our collective health continues to decline in key metrics even as spending doubles, triples and quadruples. The same can be said of defense, education and many other industries.

Sectors such as agriculture have already seen employment decline by 98% even as production rose; there are still improvements in agriculture (robotic milking machine, for example) but the low-hanging fruit in agriculture as well as in medicine, education, etc. have all been picked.

The next wave of innovation will destroy protected profit centers and employment; even the Armed Forces are not immune, as the "ships of the future" will have relatively small crews and robotic drones will replace high-cost, high-employment weapons systems.

The semi-magical belief that technological innovation will create wealth in such quantities that all other problems become solvable may well be false. We may have entered an era of marginal returns, where innovations destroy jobs, wealth, assets and debt--the very foundations of "growth."

I have begun to speculate about a future where energy might be abundant but few can afford to consume much: money and income may be scarcer than energy.

The one innovation that might energize an entirely new field of employment is digital fabrication, the decentralization and distribution of production. But this will also creatively destroy jobs dependent on the present supply chain.

National governments have over-promised entitlements to their citizens on a vast scale, and the current "solution" to the mismatch of promises to national surplus is to borrow monumental sums to fund the promises. If innovations actually shrinks employment, incomes and wealth, then the base for taxes and debt will quickly shrink to the point that the debt is unserviceable. The Status Quo will collapse financially, even if energy and labor are both abundant.

Consider END OF GROWTH - six headwinds: demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt.(via Zero Hedge)

The point made in this lengthy essay is a powerful one: the common feature of the transformative technologies of the 20th and 21st centuries is that they could only happen once. They are one-offs that cannot be duplicated. Doing more of what has failed will only set up a grander failure as returns on all our debt-based "investments" become ever more marginal and the return on increasing complexity drops into negative territory. Once complexity yields negative returns, the systems that depend on complexity quickly destabilize and implode.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization2. Crony capitalism and the elimination of accountability3. Diminishing returns4. Centralization5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Wednesday, December 26, 2012

The fiscal cliff is not the only cliff we're racing toward; there are others.

The fiscal cliff dominates the mainstream news, but it is more like a bump on the pathway to the real cliff. In essence, the path has turned down and we're picking up momentum, gaining speed as we head for the cliff.

The real cliff is the gap between what has been promised and what can plausibly be collected in tax revenues: $86 trillion but one recent estimate, over $120 trillion by other guestimates. The difference is caused by the relative rosiness of the projections to control Medicare and Medicaid spending. Lower estimates assume we can stop the growth of these programs in the long-term, something that has not yet happened for the reason that the system lacks any controls to do so.

This gap widens by $7 trillion a year. That is, the promises to present and future retirees and beneficiaries goes up if we count the promises made not just for 2013 but for the future.

This $7 trillion is twice the entire Federal budget and roughly 50% of the nation's GDP.

Understood in this way, we can see that raising taxes by $200 billion or cutting expenditures by $200 billion is not going to keep us from hurtling off the real fiscal cliff in a few years.

The fiscal cliff is only one edge we're racing toward; there are others. One is a Constitutional Crisis cliff that is just beyond the fiscal cliff, because the Constitution has failed to limit the power of concentrated wealth (the financial Aristocracy) and failed to resolve the Tyranny of the Majority: 50+% of the voters are now dependent on Federal transfers, while 25% pay 90% of the Federal income taxes. Those collecting benefits will naturally vote for what they perceive as their immediate self-interest, which is raising taxes on the minority until the minority rebels.

The only other option is to print the needed $100 trillion, which will destroy the nation's currency and economy. Either way, the 50+% will find the promises made are empty. Either the oppressed 25% opt out ("when belief in the system fades") and tax revenues collapse or everyone's $1,500 transfer from the Federal government will buy a single loaf of bread. Either way, we will face a political crisis.

We have been trained to ridicule any suggestions that technology won't/can't save us, but the one undeniable truth about technology is that it destroys 90% of the jobs in the industries it revolutionizes. Agriculture, for example. Music stores. Travel agencies. Some other employment sectors are only cut in half, for example admin assistants. The range of job losses triggered by advances in technology is between 98% and 50%, depending on the rigidity and inefficiency of the industry being transformed.

For forty years we have counterbalanced this loss of employment by borrowing and spending money on labor-intensive consumption: more healthcare, more retail, more tourism / hospitality, more government. But even these sectors are starting to come under technological pressure, despite the political moats that have been dug around healthcare, education, defense, housing, etc.

The pressure is not just technological, it is financial: the game of borrowing ever-more money to fund all this labor-intensive consumption is almost over. Right now we have a structural deficit of $1.3 trillion, and simply keeping it at this level will require politically impossible limits on the growth of government spending. Meanwhile, tax revenues have topped out. As tax rates go up, people change their behavior to pay less taxes. As a result, tax increases always raise far less money than static, linear projections estimate.

Many claims for technological revolutions are overblown and unrealistic. High school physics, chemistry and biology, bolstered by an interest in keeping up with scientific advances (via mainstream science magazines such as Scientific American), is more than enough to analyze claims of "scientific revolution" with a grounded skepticism. To take but one example: all those stories about nano-robots being introduced into our bloodstream to chomp away at our clogged arteries. What will fuel these little machines? Some recent work suggests they can use glucose as a fuel, but even this ignores the reality that the clogged arteries are a symptom/result of lifestyle choices, not the cause per se of heart disease. In one field after another, horrendously costly "cures" are actually being directed at symptoms, not causes.

With even a modest foundation of scientific understanding, many of the claims for "revolutionary" technological advances founder on basic limits of the real world or the cost and difficulty of scaling up a technology to the point that it is both affordable and broadly applicable.

I recently saw an article hyping an advance that could eliminate batteries in pacemakers--the aforementioned glucose-fueled electronics. But given that perhaps 1% of the global populace can afford a pacemaker, how "revolutionary" is this advance? It seems extremely marginal compared to indoor plumbing, clean water, eliminating malaria, etc.

What technology reliably accomplishes is a wholesale reduction of human labor and jobs. What it no longer does is create new labor-intensive industries.

We thus face an inequality cliff that is (unsurprisingly) connected to the fiscal and constitutional cliffs: how do we transfer wealth from the productively employed few to the many unemployed/ under-employed without creating a society of dependents? We have "fixed" this problem by borrowing or printing trillions of dollars. That "solution" has now entered the marginal-return death spiral.

We will have to come up with a new social contract built on community rather than a debt-dependent Central State and its cartel/fiefdom partners. Hoping that technology will solve that knotty problem for us is delusional, as technology only further reduces human employment.

This essay was drawn from Musings Report 49. The Musings are sent weekly to subscribers and major financial contributors (those who contribute $50 or more annually).

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization2. Crony capitalism and the elimination of accountability3. Diminishing returns4. Centralization5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Tuesday, December 25, 2012

Why am I hopeful? the Status Quo is devolving, and a better way of living lies just beyond the corrupt, wasteful, ruinous consumerist debt/financial tyranny we now inhabit.

First, let's start with a Christmas song by longtime reader/contributor Dan T. who is a professional songwriter/musician: The Happy Christmas Song - thank you, Dan, for the joy of this music.

Readers often ask me to post something hopeful, and I understand why: doom-and-gloom gets tiresome. Human beings need hope just as they need oxygen, and the destruction of the Status Quo via over-reach and internal contradictions doesn't leave much to be happy about.

The most hopeful thing in my mind is that the Status Quo is devolving from its internal contradictions and excesses. It is a perverse, intensely destructive system with horrific incentives for predation, exploitation, fraud and complicity and few disincentives.

A more human world lies just beyond the edge of the Status Quo.

I know many smart, well-informed people expect the worst once the Status Quo (the Savior State and its corporatocracy partners) devolves, and there is abundant evidence of the ugliness of human nature under duress.

But we should temper this Id ugliness with the stronger impulses of community and compassion. If greed and rapaciousness were the dominant forces within human nature, then the species would have either died out at its own hand or been limited to small savage populations kept in check by the predation of neighboring groups, none of which could expand much because inner conflict would limit their ability to grow.

The remarkable success of humanity as a species is not simply the result of a big brain, opposable thumbs, year-round sex, innovation or even language; it is also the result of social and cultural associations that act as a "network" for storing knowledge and good will--what we call technical and social capital.

The social capital and "return on investment" earned from investing time and energy in community and other social networks has been replaced by a check from the Savior State--a transfer payment that surely beats the troublesome work of investing in community in terms of risk and return.

The net result of the Savior State dominating society and the economy is the rise of a pathological mindset of entitlement and resentment--the two are simply two sides of the same coin. You cannot separate them.

Once self-reliance has been lost, so too has self-confidence been lost, and the Savior State dependent--individual and corporation alike--soon distrusts their ability to function in an open market.

This is a truly sad, self-destructive state of affairs, and deeply, tragically ironic. The calls for "help" quickly lead to dependence on the Savior State, and that dependence quickly breeds complicity and silence in the face of repression and predation by the State and its corporate partners.

In a very real sense, citizens relinquish their citizenship along with their self-reliance and self-worth once they accept dependence on the State.

I often mention that the U.S. has much to learn from so-called Third World countries that are poorer in resources and credit. In many of these countries, the government is the police, the school and the infrastructure of roadways and energy. Many of these countries are systemically corrupt, and the State is the engine of enforcing that corruption.

Rather than something to be embraced and lobbied, involvement with the State is something to be avoided as a risk. In everyday life, people rarely encounter the government except in law enforcement or schooling.

As a result, people depend on their social capital and community for sustenance, support, work and connections.

This is not altruism, it is mutually beneficial.

Once a community dissolves into atomized individuals who each get a payment from the Central State, then they no longer need each other. Rather, other dependents on the State are viewed as competitors for the State's resources.

These atomized, isolated individuals have a perverse relationship with the State and what remains of the community around them: lacking the self-worth earned from work or engagement/investment in a community, then their only outlet for self-identity is consumption: what they wear, eat, drink, etc. as consumers.

This dependence on the State also serves the State's goal, which is a passive, compliant populace of dependents, and distracted, passive workers who pay their taxes. Thus dependence on the State and a hollow consumerism are ontologically bound: one feeds the other.

The era of debt-based consumption as the engine of "growth" and "prosperity" is coming to an end. Adding debt via credit no longer creates growth; it actually takes away from the economy by expanding debt service (interest payments).

The vast majority of developed-world people have had the basics of life since the late 1960s -- transport, food, shelter and utilities. The "growth" since then depended on cheap, abundant oil and a consumerist mentality in which one constantly re-defines and renews one's identity not from social investments in others or the shared community but from consumption.

Not coincidentally, this dominance of consumption as the only metric for "growth" (as opposed to, say, productive activity) has been paralleled by the dominance of the Central State.

The end of credit-based consumption will be a very positive development, as will the devolution of the Savior State. The Savior State is like oil--both are at their peaks and are starting their inevitable slide down the S-curve. The world they created was not as positive for human fulfillment and happiness as we have been told.

Indeed, study after study has found that people with the basics for life, a higher purpose that requires sacrifice and a tight-knit community are far and away happier than isolated, atomized, insecure consumers, regardless of their wealth and consumption.

I see the potential for a discontinuous plunge into chaos driven by unsustainable debt every time I read a macroeconomic analysis. But "on the ground" in my own life, I see something different. Every day, in millions of unheralded ways, I see individuals making incremental changes in the direction of sustainability. There are twice the number of farmers' markets that there were 10 years ago, largely because the number of farmers is actually rising for the first time in modern American history. My buddy who owns an electric bike shop can't keep them in stock, because people are dumping their second cars in favor of e-bikes. There's more solar on rooftops every week in my little Tempe suburb. Etc. etc. etc.It adds up to "damping the discontinuity," and perhaps explains why we are six years into fearing a plunge into horror that never quite seems to materialize. The better society that you envision - I often think as I read your great essays - may be quietly building itself under all of our noses.

The obvious question, of course, is will it happen fast enough? But I am very much an evolutionary theorist. Unlike Mencken, I don't see boobus Americanus when I look around me, tempting as that dismissal may be. The deeper truth about even the most pathetic Americans is that, like all human beings, they are the end product of 250,000 years of homo sapiens selecting for survival and reproduction, which means selecting for problem-solving.

And I dispute the notion that the "default" way to solve the survival-reproduction problem is to kill or otherwise tear communities apart. At a deep level, we understand that groups and tribes survive more readily - and allow us to mate and raise young more successfully-- than do individuals. I am confident that the emerging solutions will be rooted in that understanding.

Should the manifesting of problems pick up speed, I guarantee that this generalized, widespread, difficult-to-track-or-quantify problem-solving will speed up accordingly. I am confident that the former won't outpace the later to any vast degree. Ultimately, I admit, that's just a guess, but there is a lot of history behind that guess.

I know the numbers you have cited of the debt that's been taken on to support the Status Quo over the past four years ($6 trillion in new Federal debt plus the $7.7 trillion bailout of the banks) don't come close to being sustainable, and suggest serious, rapid, negative change. But a brilliant thinker once remarked that "Food is wealth, health is wealth, energy is wealth; all else is illusion."

So if the first thing that changes is the internalization of this ethic, the remainder of the changes won't be so difficult. Big if. Possible, though, because it will become necessary. Maybe the best example of "problem solving" that I cited earlier will be the revamping of problematic values...

Also - a huge, overlooked positive enjoyed by Americans is low population density amid vast tracts of arable land in a temperate climate. If sufficient food is the real basis for wealth, we'll need to seriously screw up - via nuclear war that spreads within our borders, for example - to experience the loss of anything we truly need. Any "suffering" rooted in the loss of cheap Chinese crap does not, I think, deserve to the labeled as such, and perhaps many people will come to realize this.
I guess I'll stay hopeful until forced to become otherwise. Have not been forced yet.

Thank you, Dan and Brad for these contributions. I will close this Christmas entry with two favorite quotes:

From the poet Rumi: Where there is ruin, there is hope for treasures.

From Leonardo Da Vinci (via Kathy K.):

Don’t underestimate this idea of mine, which calls to mind that it would not be too much of an effort to pause sometimes to look into these stains on walls, the ashes from the fire, the clouds, the mud, or other similar places. If these are well contemplated, you will find fantastic inventions that awaken the genius of the painter to new inventions, such as compositions of battles, animals, and men, as well as diverse composition of landscapes, and monstrous things, as devils and the like. These will do you well because they will awaken genius with this jumble of things.

Best wishes to you for a safe and happy holiday.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization2. Crony capitalism and the elimination of accountability3. Diminishing returns4. Centralization5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Sunday, December 23, 2012

There are no easy solutions, there are only costs, risks and trade-offs.

At least one reader was upset that I recently chose to write about the stock market rather than the tragedy of December 14. I chose not to address the mass murder out of respect for the families of those whose lives were taken. I did not want to exploit the tragedy in pursuit of visibility or an agenda; my thoughts were solely on the families of those lost. For it was not just the lives of the murdered which were taken; the families have been robbed of everything they held dear and irreplaceable.

I have no agenda or pontification to push here. Other readers asked me to address the tragedy and in response to those requests I am doing so with great reluctance.

These are my thoughts, and I do not claim they represent a "solution" or even an organized response.

1. Analyzing the particulars of this mentally ill gunman does not necessarily lead to valid generalizations. I have lived long enough to see mass murders of many types: snipers who killed dozens within a short time, snipers who killed singly at random, snipers who shot into passing vehicles, killers who set off bombs--the list is drearily long. After the fact, those seeking generalizations that cover all the killers can find their generalizations; but before the fact, generalizations have limited predictive value.

The human mind is a complex, easily destabilized instrument; a great many people suffer from serious mental illnesses. Estimates are all over the map, but let's say 1% of the human populace suffers from serious mental illness: psychosis, schizophrenia, etc. Given that there are roughly 250 million adults in the U.S., then this 1% represents a population of 2.5 million severely mentally ill people.

The number of severely mentally disturbed people who become mass murderers is a small number. Are any generalizations capable of identifying the relative handful of troubled individuals who might become mass murderers out of 2.5 million people? If we cast a wider net, this number might easily be 7.5 million people, i.e. 3% of the adult populace.

The point is that identifying a handful of potential mass murderers among millions of people requires 100% "total awareness," i.e. a profile of every mentally ill/disturbed person.

2. This is the conclusion reached by the National Security State with regards to stopping terrorism: monitoring 99% of all emails and transactions isn't good enough, because the 1% that slips through is still an enormous number. This is the logic behind the "total awareness" goal of logging and scanning 100% of all emails, phone calls and transactions, and then using advanced computing to seek patterns in the resulting deluge of data. Anything less is in a sense irresponsible because it is so visibly prone to failure.

3. Mass murderers do not choose to face trained, heavily armed people in body armor; they choose to slaughter unarmed, unprepared people. When trained opponents arrive, the killers typically kill themselves or surrender.

Hardening is a relative concept. Tragically, we have seen mass murder committed on military bases and the entrance to the CIA, sites that might be assumed to be hardened. Clearly they weren't hardened enough against those presumed safe, i.e. those in uniform or with I.D.

This suggests that hardening potential targets simply forces the killer to locate a softer target. Once again this logic forces us to harden 100% of all potential targets because the 1% that are left unhardened will be the natural choice of the deranged but observant killer.

Or the killer can follow the multitude of other killers and kill vulnerable individuals one at a time.

4. Hardening targets is not as straightforward as we might initially imagine. Let's take aircraft hijacking as a example. If you place one guard on the plane, that guard becomes the first target of the hijacker, who will have the advantages of surprise and advanced planning.

Suppose instead that all able-bodied and psychologically "normal" citizens were required to undergo paramilitary training for at least 90 days and thereafter to carry concealed firearms in public. Every airline flight would largely consist of armed and reasonably well-trained adults. This would make hijacking a very hazardous method of mass killing.

The point is obvious: to truly harden a public target, the only robust solution is to decentralize security so thoroughly that the would-be killer cannot formulate a way to neutralize all potentially deadly opposition.

That said, it wouldn't take much for those bent on mass murder to set hijacking aside in favor of a shoulder-launched missile aimed at fully fueled taxiing aircraft from a safe distance, or sneaking a bomb into the unsecure ticketing area, or even into the crowded room of people waiting to get through security.

In other words, hardening targets in public life to some degree simply drives potential killers to exploit remaining weaknesses. It is essentially impossible to harden our thousands of miles of borders with 100% certainty that no one could sneak a shoulder-launched missile into the country, or that a sniper couldn't make use of a tower or forest or any number of other places with ample fields of fire to kill people.

The logic of 100% "total awareness" and hardening every aspect of public life is powerful, as is decentralizing security such that any average citizen could resist or stop a determined or deranged killer.

But 100% awareness and hardening requires a sacrifice of rights and treasure. Nothing is free in life; everything requires trade-offs. Is it worth it? That is the purpose of democracy, to enable those who will pay the price privy to the decisionmaking.

5. A large number of physicians and nurses read oftwominds.com. I have never heard any of them say that the nation squanders enormous assets on mental health. What I do hear is that mental health is given short shrift despite the staggering 18% of GDP we spend on healthcare.

6. Law enforcement can only act after the fact, i.e. a law has been broken and evidence supports an arrest. The U.S. treasures individual rights such that a deranged person can generally only be held for 24 hours, and only then if he is deemed to pose an immediate danger to himself or others. Primary care doctors who treat severely mentally disturbed people in emergency rooms often have few resources to refer these individuals to for further treatment.

That tens of thousands of mentally ill people "fall through the cracks" of our complex and costly healthcare system is obvious to anyone who walks around any urban center of any American metropolis.

7. The mainstream media (not a non-profit or disinterested enterprise) and social media play key roles in publicizing "successful" attacks; the frenzy of global coverage makes "copycatting" attractive. Rather than get into a dead-end discussion of "freedom of the press," (we cannot control social media, etc.) I think the point is to acknowledge that sensationalizing "if it bleeds, it leads" has a cost that though difficult to quantify is still a cost. To claim otherwise is to be in denial of the obvious. Once again, there are trade-offs. Everyone participating in sensationalizing mass murder is complicit in this cost.

8. Does the culture and society of America generate a higher rate of mass murderers than other societies? If this is a statistically valid conclusion (and I have no idea if it is or not), then what sort of inferences can be drawn from this? If data does not support this conclusion, then what inferences can be drawn from that?

Or are there as many attacks on innocent people per 1,000 residents (per capita) in other nations, but attacks in America are deadlier due to relatively easy access to firearms, ammo and body armor? (It is obvious deranged killers are adept at hardening themselves against opposition with body armor. Hardening is not exclusively available to the protectors.)

Or does the ineffective patchwork of mental health services in America enable a larger number of troubled mentally ill people to pass through weak social and medical filters and gain access to the means of mass murder?

This seems to be a possibility that could be supported by data.

If we follow the logic of "total awareness," then the best available solution to mass killing sprees might well be 100% compulsory universal national service and a universal mental health system that requires every school child (even home-schooled children) to have annual physical and mental examinations from the age of 12 on and to receive appropriate medical care and treatment, and to enter compulsory national service at the age of 18 for two years.

There would be no exceptions, except for those institutionalized for severe disabilities. Those of sound mind confined to wheelchairs, for example, would still be required to serve the nation in some capacity that recognizes their limited mobility as a restriction but not one that precludes their service.

There can be no exclusions, of course, because some mentally disturbed persons could game the system to escape detection. Remember the logic of "total awareness": it only works if 100% of the populace is screened and provided treatment and the data on their care is made available on a national scale.

Universal service would expose every resident to the eyes and ears of their peers and supervisors. The severely mentally disturbed person would be highly unlikely to pass through such a diffused, decentralized filter unnoticed and untreated. If the goal is to treat those who need care, to serve their own interests and those of society at large, is there any other way to do so other than compulsory universal care?

If universal national service included military training, administering first aid, and other critically important skills, then the "hardening" of society would move beyond first-responders and law enforcement to the society as a whole.

This is the logic of decentralization, hardening, "total awareness" and "total care."

Alternatively, we accept that our patchwork, underfunded mental health system will be unable to identify those who are at risk of becoming mass murderers and that half-measures of increasing security via centralized policies will leave plenty of soft targets available.

Consider these points for context. We accept roughly 12,500 murders and 32,300 people killed in vehicle accidents annually without much media attention or pundit hand-wringing. That is 450,000 deaths per decade. Many of the murders (perhaps a third) are drug-dealing related, and thus they might be stopped by the legalization and official controlled distribution of currently illegal drugs. At least a third of the vehicle accidents involve alcohol, and perhaps more restrictive DUI laws similar to those in Europe would save many if not most of these 10,000+ lives lost to alcohol-impaired drivers annually.

Many children lose their lives due to drunk drivers every year; are these innocent lives lost not worthy of our attention? How do we accept all these deaths as "unavoidable" when clearly more could be done within our current system?

We accept 150,000 deaths a decade as a direct result of our drug laws covering both legal and illegal drugs. Little fuss is made about these 150,000 deaths that appear to be largely preventable by easily implemented measures.

Let me end with an example from my personal experience. In Japan, the local police do house-to-house checks so they know exactly who is living in every dwelling in their locale. This is a form of "total awareness."

Japan remains a democracy, but one with different social values: in Japan, the rights of society to be protected from individuals exceed the rights of individuals. This is the social contract.

But even this "total awareness" isn't perfect. Fugitives have evaded detection for years by changing their identities, and there are now people living beneath bridges and underpasses who may not be known to the local police.

None of the above should be taken as recommendations or proposed solutions. The point being made is that if the current social contract is left as is, mass murders will continue to occur based on the inputs to the system: plentiful soft targets and the means to commit mass murder and a fragmented, patchwork mental health system.

Centralized government can never "harden" a society; very quickly, marginal returns set in. The only way to harden a society is to transform it into a latter-day Sparta where every citizen is a trained guardian of the social order. The only way to transform mental healthcare is to make it universal. This would require a reworking of the social contract on multiple fronts, in ways many would find counter to their stated values.

We accept tens of thousands of needless deaths as "unavoidable" without really applying logic and data to this presumption. If we follow data and logic, we quickly reach much different conclusions.

Right now, universal healthcare (including mental health services and screening) is anathema, despite the fact that the benefits of "total care" would be immediate and transformative. Since this alternative is unacceptable, the inputs and structure of the current social contract will remain unchanged, and so the output will also be unchanged.

If we are serious about preventing tragedies of this type, we need to examine our entire social contract and the trade-offs we are making. There are no easy solutions, there are only costs, risks and trade-offs.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization2. Crony capitalism and the elimination of accountability3. Diminishing returns4. Centralization5. Technological, financial and demographic changes in our economyComplex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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